What Are Inverse ETFs?

Inverse ETFs are used to profit from market declines but can be complicated and risky.

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What is an inverse ETF?

An inverse ETF is a type of exchange-traded fund (ETF) that bets against the expected daily performance of an asset or market index. During periods of volatility, day traders may use these “short” or “bear” ETFs as a way to reduce their exposure to or potentially even profit from downward market moves. Inverse ETFs are risky and speculative investments that aim to achieve goals similar to short selling. As a result, the U.S. Securities and Exchange Commission describes inverse ETFs as “specialized products with extra risks for buy-and-hold investors.” » MORE: See our picks for the year's best wealth managers » MORE: » MORE:

How do inverse ETFs work?

ETFs are bundles of assets that aim to mirror an existing index return. Inverse ETFs seek daily performance objectives opposite to that of an asset or index. To do so, they’re composed of derivatives such as options, swaps and futures. For a simplified explanation, say the S&P 500 declines 2% in a day. The owner of an S&P 500 inverse ETF could stand to gain 2%. However, if the index were to instead grow by 2%, the investment would decline 2%. However, an inverse ETF can also be leveraged, meaning it can seek 2x or 3x the expected performance of the index or asset it tracks. That's where things get especially risky. In this example, if the S&P 500 drops 2%, with a 3x leveraged inverse ETF, you'd theoretically make 6%. But if the index rises 2%, you'd lose 6%. Leveraging an investment compounds the risk taken. » MORE: Do you need a financial advisor? Take the quiz » MORE: » MORE:

Risks and advantages of inverse ETFs vs. short selling

The fact that it’s relatively easier to buy inverse ETFs than it is to short a stock doesn’t mean they’re a good fit for every portfolio. Yes, ETFs, including inverse ETFs, can be traded through a regular brokerage account. However, buying and selling an inverse ETF requires knowledge of day trading, focus and time. Inverse ETF performance targets are calculated daily and reset daily. So traders must offload any inverse ETFs by the end of the day or risk potentially compounding their losses. Making the wrong bet or holding it for more than one day can make inverse ETFs a costly investment. For savvy traders, though, inverse ETFs can offer downside protection without the additional risks and high barriers to short selling. To short a stock, a trader must first open and fund a brokerage account called a margin account. Margin accounts require an application and approval process similar to a loan. Then, short selling involves borrowing and selling securities with the expectation that their price will fall and repurchasing them for a lower price. Because short sellers must return the borrowed shares, they’ll eventually have to repurchase them. If the share price rose instead of fell, short sellers could lose much more than their initial investment if the share price surges.

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Margin account vs. cash account: The biggest differences. What is a bear market? What to know about shorting a stock. Neither the author nor editor held positions in the aforementioned investments at the time of publication. Neither the author nor editor held positions in the aforementioned investments at the time of publication. Explore more on Article sources NerdWallet writers are subject matter authorities who use primary, trustworthy sources to inform their work, including peer-reviewed studies, government websites, academic research and interviews with industry experts. All content is fact-checked for accuracy, timeliness and relevance. You can learn more about NerdWallet's high standards for journalism by reading our editorial guidelines. U.S. Securities and Exchange Commission. Updated Investor Bulletin: Leveraged and Inverse ETFs. Accessed Sep 4, 2025. Financial Industry Regulatory Authority. The Lowdown on Leveraged and Inverse Exchange-Traded Products. Accessed Sep 4, 2025. About the author Durana Alieza Durana is a former investing writer at NerdWallet. She has over a decade of journalism experience covering housing, labor, gender and public policy issues for the Eviction Lab, The Fuller Project for International Reporting, New America and Slate. Her work has appeared in USA Today, The Washington Post, The Atlantic and Harvard Business Review. She is based in St. George, Utah.